LNG cost blowout hits Exxon partners

Paddy Manning

A $US3.3 billion cost blowout at the Exxon Mobil-led PNG LNG project has stoked fears a planned ''second wave'' of Australian LNG projects may struggle to gain approval.

Operator Exxon announced that the total project cost would increase 21 per cent to $US19 billion, although the project would remain on schedule for start-up in 2014. The biggest single factor was $US1.4 billion in foreign exchange costs.

Bell Potter energy analyst Johan Hedstrom said the cost blowout was ''particularly disappointing'' and underlined fears of cost escalation in Australian LNG projects. ''We really had been led to believe that Exxon-Mobil was better at managing projects like this as far as cost and schedule.''

Mr Hedstrom described the 21 per cent blowout - the second increase since the project was sanctioned in 2009 - as ''a fairly chunky increase … particularly when the project is 70 per cent complete''.

''I'm wondering if they've overstated the cost blowout, to avoid another one,'' he added.

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Mr Hedstrom said Exxon must have assumed the Australian dollar would fall against the greenback by now, lowering construction costs. But he estimated the dollar would need to fall US20-25¢, to US80-85¢, to account for the $US1.4 billion adjustment.

The federal government is hoping to secure investment in a second wave of Australian LNG projects including the Shell/Petrochina Arrow LNG coal seam gas development in Queensland (approximately $20 billion), and Woodside Petroleum's Browse LNG offshore conventional project in Western Australia, both due for a final investment decision in 2013. Other longer-dated projects include the Santos-led Bonaparte floating LNG, BHP Billiton's Scarborough development and Woodside's Sunrise project in the Timor Sea.

Mr Hedstrom said Monday's announcement was ''yet another sign we are facing serious cost pressures''.

''It's going to be very hard to get another LNG project approved whilst we're going through this stage of cost pressures.

''I think the next wave of projects is probably going to be put on hold.''

''Those that are committed - including the Gladstone [coal seam gas to LNG] projects - are obviously going ahead but it's going to be hard to do expansions.''

Mr Hedstrom tipped consolidation of the four CSG developments in Queensland, particularly Arrow with either Santos' Gladstone LNG project or BG Group's Queensland Curtis LNG project. ''It would make sense for Shell's Arrow gas reserves to be sold to help out with the Santos or BG project - both are short of gas reserves,'' he said.

Oil Search closed down 25¢ to $7.11 while Santos shares closed down 25¢ to $11.02.